class: center, middle, inverse, title-slide .title[ # Principles of Macroeconomics ] .author[ ### ECO 2307 ] .date[ ###
Spring 2023
] --- class: center, middle, inverse # Chapter 9 ## Unemployment and Inflation <img src="data:image/png;base64,#images/qr_codes/QR10.png" width="40%" style="display: block; margin: auto;" /> --- ## Measuring Unemployment .panelset.sideways[.panel[.panel-name[Intro] Problem - ~ 300 million people in US - monitoring/reporting is difficult/costly Solution: make educated guesses from survey data Each month, the U.S. Census Bureau conducts the **Current Population Survey** (a.k.a. the **household survey**) - ~60,000 households selected to be “representative” - Household members of “working age” (16+ years old) - Asked about employment during “reference week” - Also asked about recent job search activities ] .panel[.panel-name[Employment Status] <img src="data:image/png;base64,#images/fig_9_1.png" width="90%" style="display: block; margin: auto;" /> ] .panel[.panel-name[Macro Indicators] **labor force** - sum of employed and unemployed workers in the economy - **not in labor force**: those who are neither employed nor unemployed - **labor-force participation rate** - percentage of the working-age population in the labor force - `\(LFPR = \Big(\frac{\textit{Labor force}}{\textit{Working Age Population}}\Big)\times100\)` **employment rate** - percentage of labor force who currently have a job or is temporarily away from their job - **employment-population ratio** - percentage of the working-age population that is employed - `\(EPR = \Big(\frac{\textit{Employed}}{\textit{Working Age Population}}\Big)\times100\)` **unemployment rate** - percentage of the labor force that is available and is actively searching for work in the previous month `\(\Big(\frac{unemployed}{labor force}\times100\Big)\)` ] .panel[.panel-name[Measurement Issues] The unemployment rate measured by the BLS is not a perfect measure of joblessness. Why? It may *understate* unemployment: - Distinguishing between people who are **unemployed** and *not in the* ***labor force*** *requires judgment* - Only measures employment, not intensity of employment It may *overstate* unemployment: - People might claim falsely to be actively looking for work - May claim not to be working to evade taxes or keep criminal activity unnoticed ] .panel[.panel-name[Unemployment Trends]
] .panel[.panel-name[UR Heterogeneity]
] .panel[.panel-name[Unemployment Length] #### How long are people typically unemployed? - Great Depression - WWII to 2007-2009 recession - COVID pandemic ] .panel[.panel-name[Participation Rates]
] .panel[.panel-name[Potential Labor force] <img src="data:image/png;base64,#images/potential_labor_force.png" width="100%" style="display: block; margin: auto;" /> ] .panel[.panel-name[Establishment Survey] The establishment survey - (a.k.a. the payroll survey) - Samples ~300,000 establishments, or places of employment, about their employees Disadvantages include: - Self-employed people not surveyed (not on a company payroll) - Newly opened firms often omitted - Information on employment only, not unemployment - Numbers fluctuate depending on establishments included, often requiring large revisions However, a big advantage is that the data are determined by real payrolls, not self-reporting like the household survey. ] .panel[.panel-name[Revisions] #### Household and Establishment Survey Data for January and February 2021 <img src="data:image/png;base64,#images/tab_9_1.png" width="100%" style="display: block; margin: auto;" /> .pull-left[ Why do these differ: - Different groups are measured - All surveys have measurement error BLS revises estimates over time ] .pull-right[ <img src="data:image/png;base64,#images/fig_9_5.png" width="100%" style="display: block; margin: auto;" /> ] ] ] --- ## Types of Unemployment .panelset[ .panel[.panel-name[Intro] .pull-left[ Jobs are continually being created and destroyed in the U.S. economy. - In 2019, about 30.4 million jobs were created, while about 28.2 million jobs were destroyed. - This is a natural and normal process for the economy. The BLS reports net changes in the number of people employed and unemployed Unemployment rates fluctuate with the economy ] .pull-right[ <img src="data:image/png;base64,#images/fig_9_6.png" width="100%" style="display: block; margin: auto;" /> ] ] .panel[.panel-name[Frictional] ### Frictional Unemployment Short-term unemployment that arises from the process of matching workers with jobs. Occurs mostly because of job search: Entering or re-entering the labor force or being between jobs. Also occurs because of seasonal unemployment: - Some jobs fluctuate in availability due to seasonal demand, like ski instructor or farm work. - To control for this, the BLS releases raw and seasonally adjusted employment figures. [Example: Sheldon becomes frictionally unemployed](http://www.bazinganomics.com/bazinganomics/2014/9/29/competence-as-a-substitute-for-politeness) ] .panel[.panel-name[Structural] ### Structural Unemployment Unemployment that arises from a persistent mismatch between the skills or attributes of workers and the requirements of jobs. Associated with longer unemployment spells Workers who are structurally unemployed may require retraining in order to obtain "modern" jobs. Example: Illustrators in the film and TV industry ] .panel[.panel-name[Cyclical] ### Cyclical Unemployment Unemployment caused by a business cycle recession. In normal recoveries after a recession, unemployment due to cyclical factors will fall. When all unemployment is due to frictional and structural factors, we say that the economy is at full employment. This means there will always be some unemployment in the economy. - Economists call this the natural rate of unemployment: The normal rate of unemployment, consisting of frictional unemployment and structural unemployment. - The general consensus of economists is that the U.S. natural rate of unemployment is somewhere between 4.0 percent and 5.0 percent. ] .panel[.panel-name[Activity] 1. For this in-class activity there will be absolutely no talking. 2. Your goal is to find someone in the class that was born in the same month as you. Finding someone born in the same month as you means you are now considered employed. 3. Once you find someone who was born in the same month as you, find two seats together and sit down. 4. If you cannot find someone who has the same birth month as you, stand on the left side of the classroom. 5. If you find people who have the same birth month as you but they are already paired up, stand on the right side of the classroom. 6. While you are waiting for the activity to finish up, discuss how you feel the current employment situation is with the people around you. Do you know the current unemployment rate? What about the unemployment rate for other countries? For specific races? Or specific levels of education? ] .panel[.panel-name[Discussion] Frictional unemployment (sitting down) - Congratulations! You found a job! - How long did it take to find it? - What are some ways that we could reduce frictional unemployment in society? Structural Unemployment (no matches) - Unfortunately your skills are not needed in this market. - How could we change skills to be employable in this market? - How do we reduce structural unemployment in society? Cyclical Unemployment (matched, but no job) - Your skills are needed, but there just wasn't a job available. - Should you update your skills? ] ] --- ## Explaining Unemployment .panelset[ .panel[.panel-name[Intro] <!-- Governments often attempt to directly influence unemployment. --> **Government intervention** - Example: - The federal government’s Trade Adjustment Assistance program offers training to workers whose firms laid them off as a result of competition from foreign firms. - This would reduce *structural unemployment*. - Other policies try to reduce frictional unemployment, for example by subsidizing new hires. - However, some other government policies probably increase unemployment, such as: - Unemployment insurance - Minimum wage laws This section explores effects of policy on employment ] .panel[.panel-name[Insurance] Suppose you have just lost your job. You want to find another and have two main options: - Take a new low-paying job immediately or - Search for a better job Which do you choose? US vs. EU - US unemployment insurance payments are low compared with other high-income countries (e.g. western European countries) - there are relatively short time limits - What do think is driving these differences between the US and EU? ] .panel[.panel-name[Benefits] ### Covid-19 and Unemployment Benefits Coronavirus Aid, Relief, and Economic Security (CARES) Act - provide funds to support firms and individuals suffering from the effects of the pandemic - included a provision to increase the normal state unemployment insurance payment by - $600 per week for four months - Average unemployment insurance benefit increased from $378 per week to $978 per week $978 per week is - equivalent to $24.45 per hour for a 40-hour week - greater than the wage rate received by more than half of workers in the United States before the Covid-19 pandemic began What do you think the effects of this policy are? ] .panel[.panel-name[Labor Unions] .pull-left[ Labor unions are organizations of workers that bargain with employers for higher wages and better working conditions. Unions are probably not a significant cause of unemployment in the United States. While they raise the wage, only about 6 percent of private sector workers are unionized, limiting the effect that unions have on the wider economy.] .pull-right[  ] ] .panel[.panel-name[Efficiency Wages] **Efficiency wage**: An above-market wage that a firm pays to increase workers’ productivity. Firms want to get the best performance they can out of their workers. - Sometimes monitoring workers is difficult or costly. - An alternative is to pay them a relatively high wage, making them motivated to perform well in order to keep their job. - These above-market wages are probably another reason why unemployment exists even when cyclical unemployment is zero. ] .panel[.panel-name[Min Wage] .pull-left[ Federal minimum wage law was introduced in 1938: - Fair Labor and Standards Act - $0.25/hour - Restricted to mining/manufacturing Binding vs. non-binding wage - In mid-2021, the federal minimum wage was $7.25/hour - Many states and cities have higher minimum wages - Example: - In 2019, California’s minimum wage was $12.00/hour - San Francisco’s minimum wage was $15.59/hour ] .pull-right[ Recall from micro theory: <img src="data:image/png;base64,#images/min_wage.png" width="100%" style="display: block; margin: auto;" /> ] ] .panel[.panel-name[Min Wage Lit] Disagreement among economists: - “it is now well-established that higher minimum wages do not reduce employment” - “the evidence is very mixed with effects centered on zero so there is no basis for a strong conclusion one way or the other” - “most evidence points to adverse employment effects” Literature over time - Pre-1990s: Time series (reductions in employment) - 1990s-2000s: “New Wave” (increases in employment) - 2010s+: Neoclassical (tend to show reductions in employment) Most studies find adverse employment effects: - Studies suggest a 10% increase in the minimum wage reduces teenage employment by about 2% - Overall effect on unemployment rate is probably small at current levels, since relatively few people earn minimum wage [Click here for a good paper summarizing the minimum wage literature](https://www.socsci.uci.edu/~dneumark/MW%20US%20literature.05.pdf) ] ] --- ## Inflation .panelset.sideways[ .panel[.panel-name[Intro] ### What is inflation? <p align="center"><iframe width="600" height="319" src="https://www.youtube.com/embed/MMG7cg5Zjm8" title="What high inflation means in the UK - BBC News" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen></iframe></p> ] .panel[.panel-name[Discussion] ### Discussion Divide into groups, and answer the following: - In your own words, what is inflation? - According to the video, what is one reason inflation is happening right now? - How does inflation affect consumers? ] .panel[.panel-name[Price levels] ### Price levels Recall from last chapter: - **price level**: A measure of the average prices of goods and services in the economy - **inflation rate**: the percentage increase in the price level from one year to the next - used GDP deflator to measure changes in the price level - different baskets of goods to estimate with different measures Two commonly-used measures are: 1. **consumer price index (CPI)**: an average of the prices a typical urban family of four pays for the goods and services they purchase 2. **producer price index (PPI)**: an average of the prices received by producers of goods and services at all stages of the production process ] ] --- ## Measuring Inflation .panelset[ .panel[.panel-name[Baskets] .left-column[ To calculate the CPI in a given year, we need: - A basket of goods - The cost to purchase the basket of goods in a base year - The prices in the current year [**CPI FAQs from BLS**](https://www.bls.gov/cpi/questions-and-answers.htm#:~:text=The%20CPI%20market%20basket%20is,its%20use%20in%20the%20CPI.) ] .right-column[
] ] .panel[.panel-name[CPI Calc] .left-column[ Since the CPI measures *consumer* prices, it is sometimes called the **cost of living index** CPI and CLI are simliar but not the same CPI-inflation used to create “fair” increases in wages and government benefits Convention means CPI in base year is 100 ] .right-column[ <img src="data:image/png;base64,#images/cpi_calc1.png" width="90%" style="display: block; margin: auto;" /> <img src="data:image/png;base64,#images/cpi_calc2.png" width="90%" style="display: block; margin: auto;" /> $$ \% \Delta CPI = \Big(\frac{122-120}{120}\Big)\times100=1.7\% $$ ] ] .panel[.panel-name[CPI Accuracy] Some potential problems with the CPI include: - **Substitution bias**: Consumers may change their purchasing habits away from goods that have increased in price. - **Increase in quality bias**: Difficult to separate improvement in quality from increase in price, say in cars or computers. - **New product bias**: The basket of goods used to change only every 10 years. (Now it updates every 2 years.) There is a delay to including new goods like cell phones. - **Outlet bias**: CPI used to only survey prices at traditional retail outlets. Now, it tries to minimize this bias by surveying people about where they actually buy products. Economists believe the CPI overstates true inflation by 0.5 to 1 percentage point (an improvement over previous methods). ] .panel[.panel-name[PPI] **Alternative measures** - The *CPI* measures inflation as experienced by consumers in their day-to-day living expenses; - the *Producer Price Index (PPI)* measures inflation at earlier stages of the production process; - the *International Price Program (IPP)* measures inflation for imports and exports; - the *Employment Cost Index (ECI)* measures inflation in the labor market; and - the *Gross Domestic Product (GDP) Deflator* measures inflation experienced by both consumers themselves as well as governments and other institutions providing goods and services to consumers **Producer price index** - The *producer price index (PPI)* is an average of the prices received by producers of goods and services at all stages of the production process. - Conceptually similar to the CPI - Includes raw materials like coal and crude petroleum and intermediate goods like flour, yarn, steel, and lumber The PPI can give early warning of future movements in consumer prices. - Why do you think this is true? ] .panel[.panel-name[CPI & PPI] Suppose your mother received a salary of $25,000 in 1995. This would have bought much more than a salary of $25,000 in 2020. We can use the CPI to estimate the purchasing power of that $25,000 in 2020 dollars: $$ `\begin{aligned} \textit{Value in 2020 dollars} &= \textit{Value in 1995 dollars}\times\Big(\frac{CPI_{2020}}{CPI_{1995}}\Big) \\ &= \$25,000\times\Big(\frac{259}{152}\Big) \\ &= \$42,599 \end{aligned}` $$ So, $25,000 in 1995 would have bought about as much as $42,599 in 2020. ] .panel[.panel-name[Real Vars.] The current standard base “year” for the CPI is an average of 1982-1984 prices. Values like wages in current-year dollars are called **nominal variables** - When we adjust them for inflation, by dividing by the current year’s price index and multiplying by 100, we convert them to **real variables** - This is useful for comparing variables across time Example - When you lend money to someone, they typically agree to pay you back with interest. - If the interest rate is 4%, for example, then a $1,000 loan paid back in a year will be paid back with $1,040. - 4% is the nominal interest rate: The stated interest rate on a loan. Adjust for inflation - Calculate the **real interest rate**, equal to the nominal interest rate minus the inflation rate. - This is an approximation, but it is quite accurate for low interest and inflation rates. - If prices rise by 2% from this year to next, then your real interest rate on the loan is only 2% (4%-2%). - This more accurately reflects the cost of borrowing and lending money. ] .panel[.panel-name[Rate Trend] <img src="data:image/png;base64,#images/fig_9_8.png" width="80%" style="display: block; margin: auto;" /> ] .panel[.panel-name[CPI Trend] .pull-left[ - What do you notice about the year-over-year percent change in prices over the past half century? - What do you wonder? What questions does the graph raise? - What’s going on in this graph? Create a catchy headline that captures its main idea. - **Does inflation impose costs on the economy?** ] .pull-right[ <img src="data:image/png;base64,#images/cpi_trend.png" width="100%" style="display: block; margin: auto;" /> ] ] ] --- ## Inflation Costs .panelset[ .panel[.panel-name[Intro] Sometimes inflation seems unimportant. - If all prices doubled overnight, it seems like nothing much would change: the prices of goods and services would have doubled, but so would your wage. - So, you could afford exactly as much as before. But not all prices and wages rise at the same rate. - So, some people will see their real wage increase due to inflation, while others will see it decrease. - Particularly for people on fixed incomes (e.g. retirees), inflation can seem unfair because the purchasing power of their income falls. ] .panel[.panel-name[Anticipation] Even if inflation is anticipated, it still causes problems: - Redistribution of income - Increased real costs of holding cash - Firms have **menu costs**: - The cost to firms of changing prices. - Frequently changing prices are inconvenient for firms (and consumers too!) to deal with - Investors are taxed on *nominal returns* - rather than *real returns* - this can increase the tax due ] .panel[.panel-name[Unanticipation] When people cannot predict the rate of inflation, they find it hard to make good borrowing and lending decisions. Example - in 1980 banks were charging 18 percent or more on home loans because the rate of inflation was very high. - People who bought homes were locked into high rates even when inflation subsided. On the other hand, - if banks lend money at a low rate and then high inflation takes place, the real interest rate they receive may be zero or negative - therefore, the risk of inflation makes banks wary of lending. **Unpredictable inflation makes borrowing and lending risky** ] .panel[.panel-name[Deflation] .pull-left[ #### Deflation is much more dangerous for an economy than inflation. Why? - Example: car buying under deflation - Great Depression of the 1930s - Japan's Lost Decade (1990s) There were concerns that significant periods of deflation might have followed the recession of 2007-2009, but fortunately that did not occur. ] .pull-right[ <img src="data:image/png;base64,#images/deflation.png" width="100%" style="display: block; margin: auto;" /> ] ] ] --- ## Discussion Does inflation affect all people the same? Based on what you learned today: - Do you think inflation will continue to rise? - Or do you believe the increase is a temporary problem? ---